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Moody’s: Government finances main vulnerability

BEIRUT: Moody’s Investors Service said that Lebanon’s ‘B1’ government bond rating reflects the country’s reduced growth prospects, high government debt level, and persistent fiscal and current account deficits.

But it noted that the rating is supported by the resilience of domestic banks and the large foreign exchange liquidity in the banking system, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

The agency indicated that its sovereign methodology is based on ranking countries on the four factors of economic strength, institutional strength, government financial strength and susceptibility to event risk.

Moody’s rated Lebanon’s economic strength as moderate, reflecting the country’s small size, per capita income and fragile economic framework.

Other countries with the same assessment include Egypt, Turkey, Lithuania and Costa Rica. It said that the Lebanese economy has significant growth potential but is sensitive to political events.

It noted that the economy is heavily reliant on the financial sector, which contributes 33 percent of GDP, the tourism sector and remittances inflows. It pointed out a number of structural weaknesses, including a weak basic infrastructure that suffers from underinvestment and inefficient management.

It added that the government’s capital expenditures are very low at less than 4 percent of GDP, given that debt servicing consumes around 41 percent of public revenues.

It noted that the economy continues to suffer from heavy electricity shortages due to the lack of long-term investment in the sector and an inefficient energy subsidy system.

In parallel, it said that Lebanon’s large financial sector, with assets equivalent to 354 percent of GDP at end-2011, is relatively insulated from geopolitical developments.

The agency assessed Lebanon’s institutional strength as low, a categorization shared with Egypt, Cyprus, Albania and the Philippines.

It noted that this category evaluates a government’s ability and willingness to pursue policies that support full and timely debt payments.

It pointed out that the fragility of successive governments prevented much-needed structural reforms, such as reforming Electricite du Liban (EdL) and privatizing the mobile phone networks, among others.

But it said that Lebanon has never defaulted on its debt servicing despite serious political and economic shocks.

Further, the agency evaluated Lebanon’s government financial strength as low, which reflects a high debt burden and large fiscal deficits.

But it added that a favorable creditor base that poses limited rollover risk mitigates this factor. Other similarly ranked countries include Egypt and Spain.

The report said that Lebanon’s public finance metrics remain very weak despite some improvement in recent years. It noted that Lebanon posted the third-largest debt level among rated sovereigns with a debt-to-GDP ratio of 126 percent at end-2011; and has the weakest debt-affordability ratio, as interest payments consumed 41 percent of revenues in 2011.

It added that the poor financial condition of EdL is weighing on the government’s revenues and expenditures.

But it noted that the domestic banking sector continues to be a reliable source of funding for the government despite the wide budget deficits, large public debt burden, and the poor track record of fiscal reforms. It added that the banking sector acts as the government's primary creditor, absorbing around 59 percent of the country’s gross debt.

Finally, Moody’s ranked Lebanon’s susceptibility to event risk at very high, similar to Bosnia-Herzegovina and Saint Vincent. It noted that this factor assesses a country’s vulnerability to adverse shocks that would materially impact its creditworthiness.

It attributed Lebanon’s very high sensitivity to event risks to divisions within its political class and its unstable geopolitical location. It noted that economic activity and the deposit activity react rapidly to political volatility.

But it pointed out that confidence in the lira remains strong, as conservative bank regulations enabled the Central Bank to accumulate a large cushion of foreign exchange reserves, which acts as a signal of confidence for non-resident depositors.

A version of this article appeared in the print edition of The Daily Star on December 08, 2012, on page 4.

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